Oil Trading Alert: Another Show of 'Strength'

On Tuesday, crude oil gained 0.48% as a weaker dollar and ongoing concerns
over tensions between Russia and Ukraine weighted on the price. Thanks to these
circumstances, the price of light crude climbed above $100 once again. Did
this show of "strength" invalidate any of bearish technical factors that we
noticed in the previous week?

Yesterday, before the market's open, the U.S. dollar moved lower after positive
euro-zone economic data. Although, the euro zone's service-sector PMI came
in unchanged at 53.1 (in line with expectations), retail sales rose 0.3% in
March, beating expectations for a 0.2% contraction. Additionally, later in
the day, the greenback extended losses after official data showed that the
U.S. trade deficit narrowed to $40.38 billion in March, from $41.87 billion
in February, while analysts had expected the trade deficit to narrow to $40.30
billion in March.

As is well known, a weaker greenback makes oil an attractive commodity on
dollar-denominated exchanges, which is bullish for the commodity. Therefore,
a sharp decline in the U.S. currency pushed light crude above $100. Despite
this improvement, another expected increase in U.S. oil supplies capped gains
and sent the price lower. How low? Let's see (charts courtesy of http://stockcharts.com).

From the weekly perspective, we see that the situation remains unchanged and
crude oil is still trading below the lower border of the triangle, the psychological
barrier of $100 and the 50-week moving average. Therefore, the bearish scenario
from our Oil Traing Alert posted on Wednesday is still up-to-date:

(...) if the commodity extends losses and drops below the psychological
barrier of $100, we will likely see further deterioration and a drop even
to around $95, where the medium-term support line (based on the June 2012
and January 2014 lows) is. At this point, it's worth noting that the CCI
and Stochastic Oscillator generated sell signals, which suggests that another
attempt to move lower should not surprise us.

Did the situation in the short term change after yesterday's session? Let's
zoom in on our picture and find out.

(...) light crude dropped to the bottom of the correction that we saw
at the turn of March and April once again. If history repeats itself and
this support level holds, we may see a corrective upswing in the coming
days and the first upside target will be the (...) 200-day moving average
(currently at $100.59).

As you see on the daily chart, we noticed such price action yesterday. Although
crude oil moved higher, this strong resistance line successfully stopped further
improvement for the second time in a row. In reaction to this show of weakness,
oil investors pushed the sell button once again and light crude came back below
the level of $100. Taking this fact into account, we remain bearish and see
this upswing as another verification of the breakdown. If this is the case,
and crude oil drops below Thursday low, we think that the price will likely
drop to one of downside targets that we discussed in our previous Oil Trading
Alert:

(...) In the case of the breakdown under the lower border of the trend
channel, declines may push the price to around $97, where the size of the
downswing will correspond to the height of the formation. Nevertheless,
in our opinion, the confirmation of the breakdown below the medium-term
line is more important because it suggests an even bigger move. of its
implication. In this case, the correction may be deeper and take light
crude to around $94.20. At this point, it's worth noting that the first
downside target is supported by the March low of $97.37 and the latter
corresponds to the 78.6% Fibonacci retracement based on the entire Jan.-March
rally.

Summing up, although crude oil moved higher once again, this improvement
was only temporarily and didn't change anything in the very short-term picture.
As it turned out, the 200-day moving average capped the gains for the second
time in a row and serves as the nearest important resistance at the moment.
Consequently, in our opinion, as long as there in no invalidation of the breakdown
below the previously-broken important resistance lines and the key level of
$100, further deterioration in the coming days (or even weeks) is likely.

Nadia is a private investor and trader, dealing in currencies, commodities
(mainly crude oil), and stocks. Using her background in technical analysis,
she spends countless hours identifying market trends, major support and resistance
zones, breakouts and failures. In her writing, she presents complex ideas with
clarity that enables you to easily understand market changes, and profit on
them. Nadia is the person behind Sunshine
Profits' 3 premium trading services: Forex
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